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Subprime Meltdown: American Housing and Global Financial Turmoil

In: Business and Management

Submitted By jlembeck
Words 1227
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Subprime Meltdown: American Housing and Global Financial Turmoil
The real estate and financial crisis was caused by a significant rise in mortgage delinquencies and foreclosures, leaving repercussions for banks and financial markets globally. The subprime mortgage crises started to become apparent in 2007 resulting in a weakening global financial system. An estimated 80% of US mortgages held by the subprime borrowers were adjustable rate mortgages. Once housing prices reached their peak during the middle of 2006, the steep decline that followed made refinancing difficult. Adjustable rate mortgages began to reset at higher rates resulting in increasing mortgage defaults. Financial firms which held most of the securities backed with subprime mortgages were left with securities with no value. Ultimately, credit around the world tightened as the capital in many banks and US government sponsored enterprises were losing value. What caused the crises can be attributed to a number of factors; the failure of homeowners to meet their mortgage payments, the adjustable rate mortgages resetting along with the extensive lending. In 2008 the mortgage industry played a crucial role in the recession when an estimated 1.5 million homeowners defaulted on payments lending to foreclosure by 2009. As a result, the mortgage industry has restructured limiting individuals to purchase homes.
From 2000-2006, home foreclosures began to rise. Thus the government began to investigate the practices of subprime lenders in response to the number of studies revealing a strong correlation between the rise in foreclosures and the subprime lending market. The adjustable mortgage rate (ARM) loan played a vital role in the crises. In an ARM, the interest rates are initially low attracting borrowers but the rates eventually adjust or reset to higher rates at some future date. In addition,…...

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